Down 80%, Is Shopify Stock a Bear Market Buy?

Down 80% so far, Shopify‘s (STORE 0.07%) decline is much greater than that of the Nasdaq composite table of contents, which has fallen “only” 33% over the same period. The beleaguered ecommerce platform has not held up well after the COVID-19 pandemic. And while its unique business model gives it an economic moat, slowing growth and high valuations should put investors on hold.

What went wrong for Shopify

Founded in 2004 and made public in 2015, Shopify is an ecommerce platform designed to help small businesses create custom online stores where they can sell items both online and in person. It stands out from major third-party online marketplaces such as: Amazon by focusing on traders rather than the end consumer.

Like most ecommerce companies, Shopify performed exceptionally well during the COVID-19 pandemic, leading to an explosion of both online shopping and online entrepreneurship. But now that the crisis has abated, investors are beginning to reassess the company’s value.

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The results for the second quarter were disappointing. Revenue grew just 16% year over year to $1.3 billion — a marked slowdown from the 57% growth rate reported in the same period last year. To be fair, this can be attributed to a challenging comparison to the exceptionally strong pandemic years. But Shopify’s management seems to have assumed the boom would never end, causing it to expand too much in anticipation of growth that never materialized. This error has been disastrous for operating margins.

Profitability seems far away

In the second quarter, Shopify reported much higher marketing, research and development, and administrative expenses (including hiring staff). But because growth was not as strong as expected, operating income fell from a profit of $139.4 million to a loss of $190.2 million in the period.

To make matters worse, Shopify also faces increasing competition from Amazon, which also features commerce solutions like Fulfillment by Amazon and Buy with Prime, which allow customers to take advantage of benefits such as free delivery and seamless checkout directly with partner stores. Competition with a behemoth like Amazon won’t come cheap. And Shopify will need to invest significant capital in its fulfillment capabilities to remain relevant in the industry.

In July, the company completed its $2.1 billion acquisition of its end-to-end logistics platform Deliverr to increase fulfillment speed and capacity. This buyout could be the first of many similar investments that consume Shopify’s capital and negatively impact margins in the short term.

The rating is too high

Despite an 80% drop in 2022, Shopify stock still looks expensive given slowing sales and unclear path to profitability. With a price-to-sale (P/S) multiple of seven, the top-line valuation is nearly triple Amazon’s 2.4. And while both companies face similar challenges, Amazon’s diversified business (including cloud computing and digital advertising) can help bridge the gap in its e-commerce business.

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Shopify does not have a backup plan and investors should avoid the stock due to the ongoing downside risk.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, serves on the board of directors for The Motley Fool. Will Ebiefung has no position in any of the listed stocks. The Motley Fool holds positions in and recommends Amazon and Shopify. The Motley Fool recommends the following options: long January 2023 calls $1,140 on Shopify and short January 2023 calls $1,160 on Shopify. The Motley Fool has a disclosure policy.

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